Earlier on this month I questioned whether to start saving for the sole purpose of buying a house, or going back to renting and continuing with the freedom to both save and invest, once I’ve paid off my debts.

At the time I didn’t have an answer, but I think I have made up my mind.

I will return to renting. Here’s why.

House prices remain inflated. Despite the credit crunch, house prices have not fallen very much at all compared to their explosive growth over the previous 9 years. While the term doesn’t fit precisely, the fact that property prices are reportedly on the increase again after “slumping” in my view is merely a dead cat bounce.

A mortgage is expensive. My generation has all but been priced out of house-buying, and the current bubble house prices remain in keep this so.  Even an interest only mortgage works out more expensive than the equivalent rental cost, and that’s even before taking into account the maintenance costs of buying rather than renting and other sundry ownership-related expenses.

I want to invest. Virtually all sources I have researched agree that financial freedom cannot be achieved by saving alone. If my desire to retire early is to become a reality, my money will need to work very hard for me and I cannot do this while tied to paying an expensive mortgage for an overpriced property. This therefore means that realistically any purchase of a house needs to be entirely made with cash once the market finally relents and corrects (or Gordon Brown stops shoring up the bubble, whichever happens first).

My inheritance may enable this. I hope not to have to cross this particular bridge for a while yet, but my grandmother left me a sum when she died. This was invested further in property by my parents and now (even post-crash) stands at around three times its original value in today’s money.

My father has a reasonable property portfolio that will one day hopefully pass to me, along with a unique liftetime accumulation of rare collectibles that may fetch anywhere from £5 to £1 million at auction depending on the day.

On my mother’s side I also have a share of their existing property.

If the figures I have are even remotely correct, then I have quite a tidy sum of future wealth to be realised at some stage, although the worth of that will vary greatly depending on when it becomes cashable, thanks to inflation. While I hope for the higher estimate, even the lower will enable the purchase of a nice property, with probably 50% still unused. The more left over the better as it’d be an excellent headstart on my compounding goals and investment plans.

All said however, I’m not in the habit of counting money I don’t have so while these figures are comforting, they may as well be written in monopoly money for the moment. The existance of possible inheritance a decade or more down the road does not change the fact I am still almost £5,000 in debt now and have no cash in savings that isn’t already earmarked for debt elimination.

My revised plan then is continue to work my way out of debt, finish my divorce, save hard for a further 12 months while resident with my parents – taking advantage of the minimal overheads that provides – and then look for a small rental property much closer to work. This will enable me to cut my diesel bill considerably as well as cut the time it takes me to get to work and back home.

Is this a sensible strategy? Would you do different?

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A little over nine months ago (January 2009) when I was at the very bottom of my financial meltdown, I made a couple of resolves.

Firstly, I vowed I’d pay off all my debts within a year, and at the time this was a massive undertaking as I owed somewhere between £15,000 and £20,000 in unsecured loans and credit cards. I had been in debt to some degree or another for my entire adult life and I was tired of it. The thought of being able to break myself free of this was truly empowering.

Secondly, I vowed I’d save for a deposit to buy a house. Right now I am back living with my mum and step-dad. While it is comfortable and super-cheap, it is just not sustainable in the long term. I am after all, 26 years old and in need of my own space to continue to enjoy the rebirth of my financially-sensible self. On the flip side of that while my mum enjoys having me back home, I am a bit of a thorn in the side of my step-father which I totally understand: It has been quite a few decades since he’s had “children” in the house.

Do I Save to Buy?

Nine months ago the decision to buy my own house made sense on an abstract level. I’d rented for 3 years, thrown a considerable amount of money at someone else in doing so, and had nothing at the end to show for it. I lived paycheck to paycheck and got deeper and deeper into debt. Right there and then, the prospect of renting again did not seem exactly enticing.

The reason I was piling on the debt as some of you will have read wasn’t entirely my fault, but that didn’t change the perceived economics of it for me. I may as well have been spending the rent money on a mortgage payment instead and have something to show for my efforts.

I’ve thought long and hard about my decision to buy since, and come up with the following issues.

I need at least a 20% deposit to get a good rate.

A few years ago 100% mortgages (even 125% mortgages) were not uncommon. For those unfamiliar with the term, this means the bank would loan you the entire purchase price of the house outright with nothing down (in the case of 100%), or would give you the entire purchase price and then another 25% as cash on top in the latter case! Needless to say this turned into the banking credit crisis/global recession we are now all suffering, courtesy of valuation fraud, irresponsible lending, artificially high prices and lots of other reasons.

My Mortgage Advisor has pre-approved me for £154,000 (c. $255,000 USD) on my own salary.  20% of this is £30,800, or a years gross salary before overtime bonuses. That’s an awful lot of money.

House prices remain very high where I live.

Most areas in England have seen property prices fall considerably. Where I live in the cosy, relatively wealthy South East, things have not been so bad. Prices have dropped, but not to the same degree. The result therefore is, compared to the rest of the country, prices remain very high and (I posit) artificially inflated.

A 30%+ deposit would secure the very best rate.

A 20% down payment secures a good rate, but 30% or more secures the very very best. This difference could end up costing (or saving) me tens of thousands of pounds over the life of the mortgage. Except, assuming I manage to find something nice in this area for ‘only’ £154,000, that would take the required deposit up to at least £46,200.

Saving this will take 3-5 years

If I stay with my parents for between 3 and 5 years, I will have somewhere between the 20% and 40% deposit required. The problem therein, is staying with my parents for between 3 and 5 years. I know it makes sense to do it but I’m not sure I’d be welcome for that length of time. Realistically then we are talking significantly longer saving to reach the required level of funding with a ‘life on hold’ attitude to get there.

I would be spending outside my comfort zone

Interest rates are historically low right now, but they won’t stay there forever. Will I be able to afford my monthly mortgage payment when the interest rate goes up to 5%? 8%? 10%? How about 15% like it did in the 1980’s? When you load yourself up high at the beginning, a small change can tip you over. A 15% hike on a £1,200 a month repayment will be significantly more painful than one on say £500-600. Trent over at The Simple Dollar has written a couple of times about the same feeling.

I need to buy for much less than my approved maximum mortgage

What this means ultimately, is that to continue my sensible debt-free, financially secure future life, my mortgage needs to be considerably less than the maximum I know I can get. If I go all out, then for the entire term of the loan, I am going to be counting my pennies wondering when they might run out. I want to count pennies in a positive way, not in a paycheck to paycheck way.

That is a lot of issues and many of them reflect my new-found sense of requiring security in my finances. This list doesn’t even touch on the usual home-owner worries such as maintenance costs, breakdowns, insurances and many more. Get Rich Slowly (another financial blog) had a similar discussion.

Or Do I Save to Rent?

When you consider all those points, renting is incredibly simple in comparison. For a deposit (that usually equates to just one months rental payment) and one month in advance, I’d get a bigger property than I could likely afford if I tried to buy, and none of the hassle. I’d also keep my liquidity without tying it up in bricks and mortar.

Fixed Outgoings

I’d know well in advance what my monthly outgoings would be in terms of the actual physical property. Rental agreements are negotiated annually and are unlikely to vary by more than 2% in either direction in any given year and if my previous experience is anything to go by, don’t vary at all. This is very comforting to my newfound financial security complex.

Keep My Cash

If I remain with my parents for another 2 years, I can leave with £30-40,000 in the bank, with some effort. That is some serious operating capital in terms of my desire to look towards longer-term investments, bonds, the stock-market and a general healthy emergency and opportunity fund. Stick it for 3 years, and that could rise to £60,000.

No Maintenance Costs

If the boiler breaks in my rented apartment, it’ll cost me a phone-call to get the matter resolved. If I own my apartment, then the whole thing becomes my responsibility to fix. Storm damaged? Flooded? Broken into? All these are covered by a landlord. I realise Buildings and Contents Insurance will cover these but they themselves are an additional expenditure for homeownership that are not necessarily required under a rental.

Bad Area /  Street Decision?

If you’ve misjudged an area and find the crime rate high, or your neighbours a nightmare, then a letter and a few weeks can see you moving out and going somewhere better. You just do not have this kind of flexibility when you buy your own house.

But: No Security of Tenancy

There is always a downside to renting. The landlord with 2 or 6 months notice can decide he (or she) doesn’t want you as a tenant any longer and you have to move. Is this an acceptable risk, given the benefits?

And Nothing to Show For It

Finally we come back to my initial issue with renting – the fact that after possibly decades of giving someone else hundreds upon hundreds of pounds month in, month out, you still don’t own a single brick of the place. Is that a problem, long-term?

Have I Decided?

In short, no. I have no idea what to do.

I think that is part of the reason why I find myself angering quickly at the slightest thing of late. I’m grumpy, seem to have lost my sparkle for life and generally feel like I may be dipping into something I’ve rarely experienced before: depression.

I need to choose a path and then drive myself towards it. All the time I remain exactly where I am now, I will continue to feel like my life is without direction or purpose. My debt freedom goal continues to approach, and I really need to have made a decision as to what to do by then, as it will drive my saving and investment decisions. I don’t want to just feel like I’m rolling the dice to make a choice. I want it to be informed and well reasoned, and above all, right.

What would you do?

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